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Saskatchewan budget saved by falling loonie

Following last week's troubling news about potash, the Saskatchewan government released its first-quarter financial report yesterday. The headline seems to be "Oil Keeps Budget in Black," with a forecast increase in oil revenue more than offsetting a forecast decline in potash and other revenues.

But the forecast West Texas Intermediate price is only up by a couple of dollars since the provincial budget. A larger difference is that the forecast exchange rate has fallen from 99 to 96 U.S. cents.

As shown at the bottom of page 4 (3 of 5 in the PDF), the forecast U.S.-dollar price of oil is up by 2.4 per cent from the budget estimate (i.e. $95.03/$92.84). But the Canadian-dollar price of oil is up by 6.3 per cent (i.e. $80.01/$75.29). This comparison also includes changes in transport costs and/or grade differentials since the Canadian-dollar value is an average wellhead price.

However, the exchange rate's effect is not limited to oil. The lower loonie has the same positive effect on the Canadian-dollar value of all commodities priced in U.S. dollars.

The forecast U.S.-dollar potash price is down by 5.8 per cent (i.e. 1 -- ($372/$395)). But the Canadian-dollar potash price is down by only 2.8 per cent (i.e. 1 – ($636/$654)).

Indeed, the potash comparison purely reflects the three-point shift in the exchange rate. Both prices are mine netbacks, so there is no difference in transport costs. (Although the U.S. price is per KCl tonne and the Canadian price is per K2O tonne, the physical ratio of KCl to K2O has not changed since the budget!)

Although Premier Wall blasted federal NDP leader Tom Mulcair for questioning the overvalued loonie, Wall is now reaping the fiscal benefits of a slightly more moderate exchange rate.

I am not holding my breath for Wall to acknowledge that Mulcair had a point, although I note that he has come around to the NDP's position on the Senate.